Market Commentary - 2013 - Quarter 2 October 2013

Market Commentary - 2013 - Quarter 2

The second quarter of 2013 was a story of two very contrasting halves. The first half saw an overall continuation of the positive returns seen during previous months with developed Western markets outperforming. The second half saw markets give back those gains and fall into negative territory, mainly due to the concerns about the tapering of the quantitative easing programme in the US and the effect this might have on interest rates and bond yields, but also due to concerns about China, its slowing economic growth and the level and quality of credit within the banking system.

Fundamentally, little has changed during the quarter as companies (with some exceptions) continue to deliver robust earnings figures. Data has been good over the quarter in those economies that have started to see some growth. The stand out economy has clearly been the US where data on employment and GDP growth has been strongest. We have also seen other regimes try to improve the pace of change, in particular in Japan where President Abe has been aiming to generate inflation by injecting huge financial stimulus into the Japanese economy. The opposite has been the case in Asia where Chinese growth has come under scrutiny and a much lower level of growth than in the last ten years is now expected. This has been part of the reason for the bigger sell off in Asia which has been seen to be supported by western financial stimulus as well as the commodity super cycle.

The consensus now is that this cycle has come to end, as the new Chinese government focuses on domestic growth, controlling the housing boom and fixing the local banking system, which is seen to be creating internal credit problems in the region. This combination of slowing Chinese Growth and the reduction of QE has shaken the faith of investors in the region.

The problems in Europe that dominated headlines for much of the previous two to three years have been less in evidence this quarter. The problems are still deep rooted, particularly in the peripheral countries, but the ECB support statement last year seems to have calmed investors’ nerves in 2013. The focus has moved to the forthcoming elections in Germany, which remains the economic hub of Europe, and once these have taken place we may start to see more progress on outstanding financial and unification issues.

In fixed interest markets we have seen sell offs in May and in later June as fears of reducing central bank support, potential interest rate rises and inflation have caused yields to rise. There is still much support in bond markets, however, and managers do not expect to see significant rotations by investors for some time yet.

Despite the more recent market falls and increased volatility, the year has been a positive one in terms of market returns, company fortitude and earnings progression. Some managers are now taking a more positive stance on growth believing core western economies are in better health than the current batch of statistics are telling us, so there may be more optimism or upside surprise than the current situation suggests. It would however be a little premature to get too carried away.

Market commentary provided by Rayner Spencer Mills – Quarter 2 2013

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Independent Financial Advisors